The Pakistani government is considering a significant change to its tax structure in the upcoming budget for fiscal year 2024-25. The proposal aims to raise additional revenue by imposing a 2.5% income tax across the entire trading chain, from manufacturers to retailers.
Targeting Non-Filers for Higher Tax Revenue
This revised tax regime specifically targets businesses and individuals who are not currently registered taxpayers (non-filers). The goal is to encourage more businesses to formalize their operations and contribute to the national tax collection effort.
Building on Previous Recommendations
The proposal to tax non-filer supplies originates from the Ashfaq Tola-led Reform and Revenue Mobilisation Commission (RRMC). While presented last year, it was not implemented by the previous government.
Potential Revenue Increase
The RRMC estimated that a 1% tax on non-filer wholesalers, distributors, and retailers could generate at least Rs400 billion annually. This translates to a significant boost for the national treasury.
Proposed Changes to Existing Tax Rates
The new budget proposal outlines a consolidation of current tax structures:
- Merging Sections 236-G and 236-H: These sections currently tax distributors (0.7%) and non-filer retailers (1%) separately. The proposal suggests merging them and applying a single 2.5% tax rate across the board.
Rationale for the Change
The wholesale and retail sector, despite contributing significantly to Pakistan’s economy (nearly 20%), has a low tax contribution. During the July-May period, this sector only paid Rs24 billion in taxes.
Supporting Data
The Federal Board of Revenue (FBR) data reveals a substantial disparity between registered and unregistered businesses:
- Registered Wholesalers: During the first nine months of the current fiscal year, sales to 46,000 registered wholesalers amounted to Rs3.1 trillion.
- Unregistered Distributors/Wholesalers: Manufacturers made Rs800 billion in sales to a much larger pool of unregistered distributors and wholesalers (97,000).
Additional Tax Proposals
The government is also considering other measures to increase tax collection:
- Increased Withholding Tax on Imports: This proposal suggests raising the withholding tax by at least 1% on all imports except those by commercial importers.
- Higher Income Tax Rates: The government might increase income tax rates for specific categories, including contractors, professional service providers, and sportspersons.
Challenges and Considerations
While the proposed tax increase aims to boost revenue, it could potentially:
- Increase Product Costs: The additional tax burden might lead to higher prices for consumers.
- Discourage Business Activity: Excessive tax pressure could discourage businesses from formalizing their operations.
The Path Forward
The Pakistani government has an ambitious target of Rs13 trillion for tax collection in the next fiscal year, requiring a significant increase. The proposed changes aim to bridge this gap. As the budget takes shape, a balance will need to be struck between raising revenue and fostering a healthy business environment.
